Keypad

ABSTRACT

Data processing systems and methods for managing transactions in auction-based trading of specialized items such as fixed income instruments are presented. The data processing system provides a highly structured trading protocol implemented through a sequence of trading paradigms. The system employs a distributed computer processing network linking together a plurality of commonly configured program-controlled workstations. The protocol and its program-controlling logic improves trading efficiency, rewards market Makers, and fairly distributes market opportunity to system users.

CROSS REFERENCE TO RELATED APPLICATIONS

This is a continuation of U.S. patent application Ser. No. 10/251,717,filed Sep. 20, 2002, now U.S. Pat. No. ______, which is a continuationof U.S. patent application Ser. No. 09/216,464, filed Dec. 18, 1998, nowU.S. Pat. No. 6,850,907, which is a continuation-in-part of U.S. patentapplication Ser. No. 08/766,733, filed Dec. 13, 1996, now U.S. Pat. No.5,905,974, all of which are incorporated herein by reference.

BACKGROUND OF THE INVENTION

This invention relates to financial transaction data processing. Moreparticularly, this invention relates to data processing systems andmethods for managing the trading of select classes of assets includingsecurities, financial instruments, commodities, and their derivatives inaccordance with specific protocols in an auction format with controlledsequences of auction events.

Economic activity has at its centerpiece the buyer-seller transactionfor goods and services produced and consumed in a market economy. It isthe fundamental mechanism that allocates resources to producers andoutput to consumers. The operation of the buyer-seller mechanism isoften a critical determinant of economic efficiency, and when operatedproperly, substantially enhances market performance.

Through history, many different approaches have been adopted to bringbuyers and sellers together, each with the objective of havingtransactions occur at or very near the “market” price of goods,satisfying the desires of both buyers and sellers. By definition, themarket price is the price that a fully educated market, given fullaccess to that market, will transact select goods. Discovery of themarket price can be accomplished by permitting full access to thetransaction by substantially all potential buyers and sellers andallowing expression of each party's desires. However, the buyer-sellertransaction should be structured to operate at very low costs—or it willdistort the market price of goods with artificially high transactioncosts. Thus, the two keys to effective buyer/seller transactions—fullaccess coupled with low transaction costs—can be and often areconflicting, necessitating trade-offs between market knowledge andtrading efficiency.

One well-known and particularly successful buyer-seller transactionsystem is known as the “open outcry auction.” Buyers and sellers collectin one location and brokers present prices for select goods to the groupvia simple vocal offerings. While this approach has been used for almostall kinds of goods, it is particularly useful where there are noestablished trading locations or markets for the selected items. Thisapproach is the dominant trading forum for exotic items such as rarepieces of art and the like. Although successful in bringing interestedparties to the transaction, the overall process can be very expensive,adding significantly to market-distorting transaction costs.

Open outcry auction techniques, modified over time, have also foundsuccessful application in many trading activities, including the buyingand selling of farm produce and livestock, commodities contracts,futures contracts on various items, and fixed income securities. Many ofthese trading activities focus on the buying and selling of essentiallyfungible items; that is, items without meaningful differences from likeitems on the market. For example, the price of a bushel of wheat forFebruary delivery is usually independent of its source. Similarly, a30-year U.S. treasury bond paying a coupon rate of 6.75% and having anAugust 1996 issue date is indistinguishable from an identical bond ownedby another investor. Accordingly, the price at which buyers are willingto pay and sellers are willing to accept defines the market price of all30-year U.S. treasury bonds of that same vintage, allowing open outcryauction trading without regard to an item's source.

(For clarity, the following description focuses mainly on fixed incomesecurities, which should in no way be construed as limiting the scope orapplicability of the invention.)

Fixed income securities issued by the United States government are knownas U.S. treasuries. These instruments typically span maturities of 13 to52 weeks (T-bills), one to ten years (notes), and up to 30 years(Bonds). T-Bills are pure discount securities having no coupons. Almostall other treasuries having longer terms are coupon notes or bonds, withdefined semi-annual interest payments to the holder. An additional andmore recent type of treasury security provides for inflation indexedpayments.

New treasury securities are auctioned by the U.S. government atpreestablished auction dates. The auction prices for newly issuedtreasuries having a face value with a set coupon rate defines thetreasuries' yields when issued. After the auction, the treasuries enterthe secondary market and are traded typically “over the counter” (i.e.,without a defined exchange). As inflation expectations and supply anddemand conditions change, the prices of recently auctioned treasuriesfluctuate on the secondary market. The new prices reflect competing bidand offer prices communicated among institutions, banks, brokers, anddealers in the secondary market.

The newly auctioned securities are traded with securities that issued inearlier auctions. Some securities are traded more often than others andare called the “actives.” The actives usually correspond to the recentlyissued securities as opposed to the older securities. Indeed, some oldersecurities are infrequently traded, resulting in an illiquid market thatmay or may not reflect the market-determined interest rate for the morecurrent securities having the same maturity as the older securities.

Accordingly, the very size and diversity of the treasury market requiresa high level of sophistication by market participants involved in thebidding, offering, buying, and selling of these securities. The verycomplexity associated with the transaction and the scale of tradingundertaken by banks, brokers, dealers, and institutional participantsnecessitates a rigidly structured approach to trading.

In the past, open outcry auction bond brokering served its customerswell, providing efficient execution at nearly accurate market pricing.The open outcry auction as applied to bond trading was implemented by abroker working with a collection of customers to create and manage amarket. Typically, customer representatives—for both buyers andsellers—would congregate at a common location (e.g., a single room) andcommunicate with each other to develop pricing and confirm transactions.This process involved representatives expressing various bid and offerprices for a fixed income security at select volumes (which areexpressed in millions of dollar at given maturities). This expressiontook the form of a loud oral “cry” of a proposed bid or offer and thecoordination with fellow representatives regarding the extraction ofcomplimentary positions until a transaction match was made and a dealdone. This “trade capture” process relied on after-the-fact reporting ofwhat just transpired during the oral outcry trade.

Recently, the trade capture process was performed by clerks who inputdata into electronic input devices. A clerk would interpret the openoutcry of many individual brokers simultaneously, who were verballymaking known the trading instructions of their customers. The quality ofthe data capture was a function of the interpretive skill of the clerkand the volume and volatility of customer orders. A significant drawbackof this type of auction data capture process is the difficulty inaccurately discerning each trading instruction as verbalized in rapidsuccession during a quickly moving market.

Many permutations of this process are known. In general, because of thelower volumes of transactions occurring at the time of its development,and the lack of suitable alternatives, the open outcry auction processremained the dominant trading mechanism for decades. However successful,this process is not perfect. Indeed, in recent years, some of theproblems in an open outcry auction forum have been amplified by thevastly increased level of trading now undertaken in the fixed incomefield. Generally, difficulties in the open outcry auction process canoccur as a result of trader personalities. For example, a loud, highlyvocal representative may in fact dominate trading and transactionflow—even though the representative may only represent a smaller andless critical collection of customers. Although such aggressive actionsat an open outcry auction may be beneficial to those customers in theshort run, overall, such trading dominance can and will likely distortpricing away from the actual market and leave some buyers and sellersunsatisfied.

Other problems exist in open outcry auctions that retard efficienttrading. The speed at which trading flows and the oral nature of theauction process create a potential for human error that often translatesinto many millions of dollars committed to trades unrelated to customerobjectives. On some occasions, the broker is left at the end of eachtrading day with a reconciliation process that may, under certain marketconditions, wipe out all associated profit from that day's trading.Also, customers may quickly change trading direction based on newinformation available to the market. Shifting position or backing out ofa previously committed transaction onvery short notice is often verydifficult in the traditional open outcry process.

There have been many efforts to incorporate computers into trading ofselect assets and financial instruments, including efforts to automatethe auction process through systems that control auction protocols.Indeed, almost all trading today involves some computer support, fromsimple information delivery to sophisticated trading systems thatautomate transactions at select criteria. However, these systems havenot significantly impacted the issues presented herein relating tosatisfaction of buyers' and sellers' complex desires in completingtransactions in open outcry auctions and traditional fixed incometrading.

In view of the foregoing, it would be desirable to provide apparatus andmethods that address the aforementioned problems of certain tradingprocesses involving buyers and sellers.

SUMMARY OF THE INVENTION

It is an object of this invention to provide a data processing systemthat supports a high volume trading system.

It is also an object of this invention to provide a data processingmethod that supports a transaction enabling process for tradingsecurities at accelerated levels with few errors and low costs.

It is further an object of this invention to provide a data processingsystem that supports a formalized trading protocol governing the controlof trading on a bid/offer market.

It is still further an object of this invention to provide a system thatin real time collects, displays, and distributes information on currentsecurities market activity and that in real time processes thisinformation to quantify the scope of order and trading activity ofparticipants.

It is yet further an object of this invention to provide apparatus forthe select processing of several types of data that are qualified priorto use and for translating the qualified data into order and tradingstates for fixed income securities.

It is another object of this invention to provide a data processingsystem that has controlled access to trading commands pursuant topre-established interactive criteria, rather than traditional bidding,offering, and trading criteria.

It is also another object of this invention to provide a computer systemthat includes multiple workstations linked by high speed communicationpaths to rapidly distribute and exchange market data to participants.

It is further another object of this invention to provide a system thatgrants priorities and rewards to participants who create liquidity whileinsuring that participants' orders are satisfied in an orderly andequitable fashion.

It is still another object of this invention to encourage buyers andsellers to reveal their total buy and sell intentions throughcommencement of a trading action that improves price execution.

It is yet another object of this invention to quantify price improvementtrading incentives of buyers and sellers and bidders and offerors.

It is another object of this invention to distribute price improvementtrading incentives to buyers and sellers.

It is yet another object of this invention to provide a database systemlinked to a price improvement protocol processor for collecting,filtering, and distributing select market data in real time.

It is another object of this invention to provide a computer systemhaving dedicated workstation input devices customized for trading byparticipants at workstations that can each be further customized to theparticular trading patterns of a given participant.

It is still another object of this invention to provide customizedtrading tools particular to a given participant, such as priceimprovement orders, stop and limit orders, contingent orders, and flagwarnings (e.g., that a particular trading limit, margin limit, tradeinitiation limit, or the like has been reached).

The above and other objects of the invention are provided by acomputer-based, data processing system having program controlled logicfor managing select trading. The data processing system employs aplurality of trading workstations linked to a server for coordinateddata flow and processing. Communication is provided by a network, suchas, for example, an Ethernet, token ring, token bus, or otherhierarchical LAN and/or WAN configuration. The system preferablyincludes a dedicated keypad for input at each workstation that providesindividually programmed keystroke commands; alternatively, otherkeyboards, keypads, or voice controlled electronic devices can be usedwith the system. Central processing logic dictates the available order,trading and allocation options, and screen displays for eachworkstation. As orders and transactions are entered, various protocolsaffect the allocation of bid-offer control, priority generation,exclusive trading time, and interactive trade management. As trades arecompleted, the system updates a linked database with newly enteredtransactional data.

In accordance with this invention, the controlling logic provides asequence of trading states for each participant. The five states are:

1. Bid-Offer State

2. When State

3. Workup State

4. Second Look State

5. Workdown State

As various transactions are entered, workstations operate in one ofthese five states. The workstation “state” determines the optionsavailable to the participant—and thus controls the flow of orders andtrades in a cost-efficient and substantially error-free manner. Whileparticipants may bid, offer, and trade on differently configuredworkstations, the protocols are universal for all participants, thusprecluding aggressive control of transactions without true capitalcommitment.

Note that although the invention is described herein in terms of afixed-income financial-instruments auction that fairly and quicklytransacts bid-offer trading while providing trading incentives, theinvention is not limited to such fixed-income instruments.

BRIEF DESCRIPTION OF THE DRAWINGS

The above and other objects and advantages of the invention will beapparent upon consideration of the following detailed description, takenin conjunction with the accompanying drawings, in which like referencecharacters refer to like parts throughout, and in which:

FIG. 1 is a system block diagram according to the invention;

FIG. 2 is a diagram of trade-data transmission according to theinvention;

FIGS. 3A-B are drawings of dedicated keypads according to the invention;

FIG. 4 is a diagram of various system states according to the invention;

FIG. 5 is a logic diagram of trade-data input according to theinvention;

FIG. 6 is a logic diagram of a Bid-Offer State according to theinvention;

FIG. 7 is a logic diagram of a When State according to the invention;

FIG. 8 is a logic diagram of a Workup State according to the invention;

FIG. 9 is a logic diagram of a Second Look State according to theinvention;

FIG. 10 is a logic diagram of a Workdown State according to theinvention;

FIG. 11 is a trading logic summary table according to the invention; and

FIG. 12 is a drawing of an interactive keyboard according to theinvention.

DETAILED DESCRIPTION OF THE INVENTION

The invention is directed to data processing systems and methods forimplementing complex trading rules in support of select transactions.One aspect of the invention relates to a hardware arrangement thatprovides a specifically tailored platform for processor enhancedtrading. This hardware arrangement encompasses a plurality of customdesigned workstations linked together. Each workstation communicates toa central server that orchestrates the trading process in accordancewith program controlled logic. The workstation includes a display forpresenting the particulars of trading activity. Preferably, a customizedkeypad permits either enhanced data/trade entry by a participant orselection of an input interface by a participant.

Another aspect of the invention is the governing logic for controllingsystem dynamics. This logic is stored in system memory and provides thesequence of protocols and rules that allocate trading priority. Thelogic also provides system responses to operative commands entered byparticipants at the workstations either directly or via brokers orterminal operators. The system logic is important in two ways. First, itprovides the guiding principles underlying the system, and thus,performance is tied directly thereto. Second, when system logic (knownas the rules dictating market access and response) is understood byparticipants—it places participants on as close to an equal footing aspossible. The system preferably provides all registered participantswith fair and complete access to the trading process.

Although the examples herein focus on fixed income instruments and thetrading of these instruments in large volumes—with the volume of a giventransaction represented in, but not limited to, dollars (e.g., $25million of 10 year treasuries)—the invention is not limited to them.

Each term listed below is used herein in accordance with its associateddefinition:

Issue A common class of fixed income security (e.g., the most recentlyissued 10-year treasury). Bid Dollar or yield amount at which to buy asecurity/Issue Offer Dollar or yield amount at which to sell asecurity/Issue Spread Difference between best Bid(s) and best Offer(s)Size The volume in dollars of a particular Bid/Offer Hit Accepting apending Bid Take or Lift Accepting a pending Offer Trade A string oftransactions at one or more prices initiated by a Hit or Take andcontinuing until timed out or done Participant A person or controllingentity receiving data on trading and responding thereto. While theParticipant is often a Trader, terminal operator, or broker acting onbehalf of a customer, this is not the only arrangement. For example,customers may directly interact as Participants. Other arrangements arealso possible. Makers Participants with pending Bids and Offers (thosewho “make” a market) Uncleared Entry Current Bids/Offers that only aMaker can Hit or Take Aggressor A Participant who initiates a TradeTraders After a Trade is initiated, all Participants involved in thetransaction (i.e., buyers and sellers) Active Side Group of Traders onthe same side of the market as the Aggressor Passive Side Group ofTraders on opposite side of the market from the Aggressor Exclusive TimeA time period commenced by a trading action during which the first bestbidder/offeror has the opportunity to trade more Price An accepted sellorder at and/or Improvement Hit below the current best Bid to sell asecurity/Issue initially for more volume than shown on the Passive SidePrice An accepted buy order at and/or Improvement above the current bestOffer to buy Take a security/Issue initially for more volume than shownon the Passive Side Trader Surplus When an Aggressor has traded theentire size shown on the Passive, Side at one or more price levels andis showing intent to trade more, or when a passive Participant iswilling to buy or sell above or below the current trading price. Thesesituations can lead to a Price Improvement Trade between Aggressors andpassive Participants.

System operation is based on the repetition of several functions, whichin one embodiment of the invention are implemented through a speciallydesigned keypad or other input means. Generally, the process begins whenParticipants enter Bids and Offers for a defined class of instruments.These orders are shown on a display screen in specific ways to reflectpriority, size, and kind. A Participant can establish trading priorityby placing a Bid or Offer at a select price and volume; Bids at the sameprice are displayed on the screen in the order in which they enter thesystem (i.e., time order); similarly, Offers at the same price aredisplayed on the screen in time order. As such, a “queue” of Bids andOffers develops with line placement for the same price set by timeorder. Alternatively, the queue can be set by a different metric, suchas, for example, a combination of time and volume. The queue (or asummary thereof) is displayed at the Participant's workstation.Typically, there is a small difference between Bid and Offer prices (the“Spread”). If no difference exists, a “locked” market occurs.

Importantly, Bids and Offers are commitments—once placed, a Bid can be“Hit” and an Offer can be “Taken” or “Lifted” by a Participant willingto trade the instrument at the set price or set of prices.

To control trading between many Participants, a level of hierarchy isset. A Participant who Hits a Bid or Lifts an Offer is promoted to a newlevel known as the “Aggressor.” By acting on a Bid or Offer, theAggressor defines (and thus establishes) the Active Side of the Trade.For example, when a Participant hits a Bid, selling becomes the ActiveSide of the Trade and buying turns passive. However, when a Participanttakes an Offer, buying is active. This can be important becauseaccording to some conventions, the Active Side pays commissions on theensuing transactions. When a Price Improvement Trade takes place,however, the commission on this Trade can be divided among theParticipants in the Trade. This allocation of commissions is premised onthe notion that the active Participants are taking advantage ofliquidity—while the Passive Side is supplying liquidity to the market,and on the notion that if a better price can be obtained during PriceImprovement trading, a passive Trader is provided with value for whichthat Trader is willing to pay. Further combinations of commissionallocation are preferable in order to encourage trading (e.g., choicesamong volume discounts, annual fixed fees, both sides paying, and payingbased on time and place of execution).

For controlled implementation, the distinction between Active andPassive Sides is important and carries more significance in processingtransactions than the Bid and Offer sides of a transaction.

Focusing further on the nomenclature for system logic, a “Trade” isconsidered a sequence of trading events, triggered by an initial Hit orTake that defines the Aggressor. A Trade continues for all suchtransactions until the Trade “clears.” During a non-price improvementTrade, the Aggressor side remains active and all transactions take placeat the price set by the initial Hit or Take—regardless of the number oftransactions that follow. To properly track activity, a Trade generatesa (virtual and/or real) single trade ticket—with an associated andscreen-displayed reference number. When a transaction reflects more thana single buy/sell, several trade tickets each reflecting the total sizetransacted per Participant per side is recorded. A set of average pricetickets or their equivalent may be generated.

In addition, the system preferably controls a Participant's maximumcommand size, thus preventing the Participant from entering orders thatare outside the Participant's permissible trading parameters. The systempreferably also protects the novice Participant. Accordingly,Participants with different skills can trade on a more level playingfield. The system can preferably further control the hierarchy ofParticipants to allow management intervention.

FIG. 1 shows various hardware components of an embodiment of a systemaccording to the invention. A plurality of workstations 10 are eachindividually linked to a central server 20 via network lines 15. Server20 includes controlling software that manages data flow to individualworkstations 10 in accordance with system constraints. The system can belinked to Participants at remote locations either directly, indirectly,and/or through the Internet. Access to trading activity is accomplishedat communication server 30 and remote server 40, which is coupled to aremote distribution hub 50 and remote workstations 60. Supplementalcommunication lines are provided via conventional phone link 90. Thisplatform further includes a 32-bit operating system that manages themulti-tasking environment within the network. The invention can beimplemented using an open VMS64-bit operating system running on DECAlpha clustered servers; however, other operating systems may besubstituted. Alternatively, the desktop client machines can beimplemented in OS/2 (Windows N/T 4.0 is a migration substitute). Theworkstation provides display and input and can be selected from Pentium®processor-based PCs, SPARC Stations® (using UNIX), or other hardware andsoftware systems and/or languages providing the requisite functionality.

FIG. 2 shows various information paths of the invention. Marketinformation is derived from the auction process and is a highly valuablesource of data to related markets, futures and options, or cash as thecase may be. Market data 100 is collected from the plurality of onlineterminals operated by Participants within the relevant market sector. Acontinual exchange of information flows between Participants (includedin market data 100) as Bids, Offers, and Trades are transacted in realtime. This information is collected by the system proprietor and enteredinto a system data processor database 110.

Online market data is then transferred to a data filter and enhancermodule 115, which clarifies and articulates the continuous incomingmarket data for use, e.g., by data accumulators and vendors 120. Oneaspect of the data enhancer operation is conversion of online tradinginformation into digital form for transmission to a classificationprocessor 130. Classification processor 130 creates a data set in anappropriate format for further manipulation, which includes generationof a coordination array of data in matrix format.

Once appropriately formatted, the online market data is then transmittedto a qualification processor 140 for determination of a real timecommand selection. The qualification processor also provides bothParticipant validation and credit limit approval with Participant andsecurity type linkages among Participant relationships and securityidentifiers. The information is unloaded into a security database 150,and then passed to a distribution processor 160.

The foregoing operation results in real time distribution amongParticipant workstations via communication lines and screen displays fordecision execution and for select distribution within the fixed incomeinvestment community. In one embodiment of the invention, three segmentsof this community are provided with the data. At options/cash 180 andfutures/cash 170, system proprietors involved in automated options andfutures processing are provided the cash market data for quantifying andevaluating specific options and futures positions pursuant to thetrading of option and futures contracts on specifically identifiedsecurities, including indices and notional securities derived therefrom.In a similar manner, the securities data is provided to systemproprietors regarding options and futures contracts to permit propertransactions in the trading of options and futures contracts based onthe identified securities data.

In the present context, data relating to the auctioning of cash marketsecurities is used to support trading in their derivative markets.Likewise, if the context were the auctioning of derivative securities,distribution flow would be to support trading in the underlyingsecurity.

The third channel of distribution for the securities is to dataaccumulators and vendors 190. This is followed by the continualdistribution of securities data to Participants within the investmentand trading community 200, to auction processing 210 in support ofautomated trading, and finally to clearing 220 in support of declaringand reporting functions associated with such trading, includingclearance operators among others.

Trading activity is highly fluid and fast paced. Accordingly, efficientinput systems enable Participants to quickly enter one of typicallyseveral trading choices available. Input systems can be enhanced by ahighly specialized keypad that permits higher trading efficiency.Accordingly, another aspect of the invention are the unique keypadsshown in FIGS. 3A-B.

During processing, various “states” exist depending on the type ofinputs received by the system. The core Bid-Offer state reflects theopen status of the market. In this state, Participants are referred toas “Makers” and “contra-makers;” during other states, Participants areconsidered “Traders” and “contra-traders.” Traders and Makers areParticipants who issue a trading command, while contra-makers andcontra-traders are those who receive a trading command. SomeParticipants, e.g., a first buyer or first seller, in the Workup Stateare known as “current workers” and are vested with the authority undersystem logic to control a Trade for a predetermined amount of time.Depending on the fixed income security or instrument, this amount oftime may be zero. Important character distinctions among Participants atvarious stages of trade processing are displayed on screen by reversehighlight or similar display attribute.

The interrelationship of these five system states is shown in FIG. 4.Initial trading is always predicated on Bid-Offer State 400, withsequence process 420 assessing system inputs to determine state changes.As inputs are entered, a state change is triggered and processing shiftsto paradigms associated with each of the five states. As each state isentered, the protocols are shifted and new trading rules apply.

Information about Participants and trading progress are provided at eachworkstation in the form of a selectively configured screen display. Inparticular, the system provides for screen display in the form of atrading quadrant or “quad” wherein key trading indicators are displayed.A sample QUAD is shown below:

QUAD 1 100.01 2 100.03 15 CUST BID BOT CUST OFFER SOLD 2001 1 0 2007 5 02002 1 0 2006 10 0 TOTAL 2 0 15 0

In QUAD 1, the current bid price is “100.01” (100 plus 1/32nd).Continuing across on the same line, the current Offer price is“100.03”—indicating a Spread of 0.02 ( 2/32nds). When a Trade is inprogress—as initiated by a Hit or Take from the Bid-Offer State, theParticipant's attention is directed mainly to the conditional promptshowing the total size being bid or offered and that can be acted uponby the Participants. This number is displayed at the intersection of theTOTALs line and one of the Bid-Offer columns (i.e., the 2 or 15). Thistotal is further defined in the quad into individual prequantities,indicating the Participant sizes in their respective rows (e.g., CUST2006's size of 10). Other QUADS or arrangements can be under Participantor logic control to display trading state information.

Above the BOT and SOLD captions in QUAD 1, a second totals counterprovides the Makers total size. In the Bid-Offer State, this total isthe same as the conditional prompt because no Trades have been executed.This changes after the first transaction when a “Traders list” iscreated—and the conditional prompt tracks the Traders' total, while theMakers' total keeps track of quantity left in the Makers' list.

Data selected for display on the QUAD is processed in accordance withlogic shown in FIG. 5 according to the invention. The system enters anew Participant CUST(ID) (e.g., “2001”) at 520 and stores this in memorywith associated trade data/command TRD(ID) at 530. The trading commandis confirmed at a system level, wherein system errors are rejected viaalarm 550. Once confirmed, the new data/command TRD(ID) is distributedat 560 to screen buffers for display of the associated work status. Thisis repeated for each new entry at 570.

The following discussion now focuses on the Bid-Offer state, whereinmarket Makers are inputting various Bids and Offers into the systemwhile waiting for an execution as the market matures. The best firstbidders and offerors receive trading priorities during clearing andExclusive Time. These pending commitments may be acted upon via Hit orTake commands by Makers currently showing or by a third party withoutshowing its position prior to the Hit (or Take). As new Bids and Offersare made, the associated prices determine the placement in the queue,with equally priced Offers (or Bids) placed in time order. Accordingly,as the market tightens with better Bids and Offers (reducing theSpread), these new positions are moved to the top of the displayedqueue.

In addition to price, Bids, and Offers, a size component is included,which is used to express the dollar volume of the pending Bid (orOffer). For a Participant to increase the size of the Bid or Offer, anew entry is made and placed in the queue separately, because the systempreferably does not increment the size component—unless the entry wasmade adjacent in time to an existing Bid/Offer already in the queue.Alternatively, the sizes could be combined as follows: as Bids andOffers are entered during the Bid-Offer state, they are displayed inrelation to their respective size, with the total Bid-Offer count(aggregate size) displayed at the noted conditional prompt. As such, theconditional prompt serves as the main impetus for a transaction becauseof its measure of apparent market capacity at a given price.

A Bid/Offer is typically (but not always) entered as “uncleared” duringthe Bid-Offer state—indicating that the Bid or Offer is only availableto the first best market Participant (shown at the top of the firstqueue). Accordingly, uncleared presentations can be acted on by onlythis Participant for a system-set time interval—that is, only thisParticipant can Hit or Take these uncleared entries. After the presettime interval has run (tracked by a system internal clock), theuncleared Bids/Offers—if still extant—become available beyond the bestprice Participant. Also, for certain securities, the preset timeinterval may be zero. More often, a known interval is established. Thereis a business purpose for this arrangement. By giving Participants withactive Bids/Offers the first chance for the new entry, theseParticipants are rewarded for showing the market on their side. Thus,the initial bidders/offerors are invited to become Aggressors—and thesystem preset interval provides these bidders/offerors with time to maketheir decision by preventing new buyers and sellers from entering theTrade (i.e., hitting or taking) for this discrete time interval.

System logic associated with the Bid-Offer state is shown in FIG. 6.Logic begins at 600 with a new data/command entry. A state selectorqualifies the state as Bid-Offer at 620. At 630, a CUST X profile istaken from the new entry and all associated data is passed into aparameter string which is entered at 640.

The system compares the new price entry, PRC(I) entered into the systemat test 650, with pending Bids (or Offers if PRC(I) is associated withan Offer). Test 650 results in one of three outcomes: first, if the newentry PRC(I) is better than the current market, logic branches to 655and the previous top tier queue, Q1, is demoted (moved) to Q2. The newentry then forms the first line in the new top queue, Q1_TOP, at 660.This allows the system to create multiple queues at select price pointsfor each side of the market. The multi-queue environment permits “PriceImprovement” trading, described in detail below.

The second outcome of test 650 occurs if the new entry is out of themarket (i.e., “worse” than the best current Bid/Offer). Logic thenbranches to 685 and a new queue, Q(N), is created. The new queue, havinga price point worse than the market leaders, is displayed below the topqueue. At 690, the new entry is placed at the top of the new queue,Q(N)_TOP.

As more entries are input, the system assesses each and places them inthe multiple queues in accordance with price, and within each queue inaccordance with time priority. This results in several price definedqueues for each side of the market and allows for Price Improvementtrading if and when a new Aggressor Takes/Hits all showing volume forone and up to all shown contra-queues.

The third outcome of test 650 is a qualified price, which leads to 680.This entry is placed at the bottom of Q1 because of time priority.

At test 700, the system checks for a new Hit/Take; if none, logiccontinues at 710 to the next entry. A positive response to test 700shifts processing to the next state at 720.

The screen display changes according to the various entries into thebidding process. In QUAD 2 below, Participant CUSTs 3001-3003 on the BIDside reflect a market of 27 million (see conditional prompt “27” on theTOTALs line). This includes a first bid by Participant CUST 3001 of 5.0million, followed a little later by a second bid of 20 million. In thisexample, Participant CUST 3007 (e.g., a bank or other institutionalParticipant) enters the picture with an uncleared Offer of 10 million(the asterisk indicates the Offer is uncleared); this is the 10 millionshown on the conditional prompt line on the Offer side. As such,controlling logic gives the original Makers the first chance at the newOffer by CUST 3007. After the preset interval, the market is againopened and the asterisk is removed.

QUAD 2 >7.625.225 TZ 108.04 27 *108.04 10 CUST BID BOT CUST OFFER SOLD3001 5 0 3007 10 0 3002 1 0 3003 1 0 3001 20 0 TOTAL 27 0 10 0

The When State is triggered by a trading command against an unclearedBid/Offer by an Aggressor who is not the first best original Maker.However, system control does not allow this trading command by the newAggressor to be instantaneously executed. In accordance with systemlogic, the trading processor creates a time interval or delay, and thusprovides the first best original Maker with time to assess the newsituation created by the Aggressor and then respond, if desired, to theuncleared entry on the Passive Side.

In particular, as noted above, the uncleared status exists for a definedinterval—controlled by a computer driven timer. Only during this timeinterval does a When State occur, which then only lasts until resolvedeither by action on the part of the first best original Maker on theActive Side or by expiration of the interval timer.

During When State processing, the system displays the originalMakers—existing with Bid/Offers outstanding prior to the entry of thenew Aggressor—and the new Traders, who enter via Hit or Take commands onthe pending uncleared Bid/Offer. These Makers and Traders are clearlyseparated on the screen (see QUAD 3B below). Importantly, these originalMakers are given the opportunity to trade at the new price pointestablished by the Aggressor; multiple Makers from the original listwill each have an opportunity to take the new price in the order oftheir priority in the queue. The system increments through each Maker.If one issues a buy/sell order at their size, they become the Aggressor.When this occurs, the logic departs the When State and can either enterthe Workup State or Workdown State depending on whether the newAggressor takes the entire volume indicated at the conditional prompt.

Once When State processing has been initiated, no trade entries from thePassive Side are permitted. Furthermore, Participants are blocked fromentering on the Active Side. Specifically, entries on the uncleared(active) side will come from new Traders, extant Traders, or theoriginal Makers. If, for example, a Trader has 10 offered and 5 aretraded, the Trader preferably can cancel the amount which is not yetcommitted during the When State.

However, if the second interval timer expires without any intercessionby the original Makers, the When entries (one or several) willautomatically trade—and the original Makers will not take part in thisTrade. During the time-controlled interval, WTAK flashes on screen tothe Makers showing a Trade on the uncleared Offer. WHIT will flash for aHit on an uncleared Bid. During this interval, the size entries forpending Makers are all initialized to zero and are no longer presentedat the conditional prompt.

When State processing is shown in FIG. 7 and is triggered by an enteredtrading command CMD(I) 810. Test 820 confirms whether the new tradingcommand (Hit or Lift) is from a new Aggressor; if not, logic continuesto 880 and then to either the Workup or Workdown State.

When the new trading command is from a new Aggressor, logic branchesfrom test 820 to 830, where the market is blocked for a preset timeinterval. At 840, all current Active Side Makers are reset to zero. Attest 850, the system determines whether these Makers intercept theAggressor before the time interval expires. If yes, the interceptingmaker becomes the Aggressor at 860, with full control over thesucceeding trade sequence. If not, the new Aggressor is set at 870, andlogic continues to the next State at 880.

Referring to QUADS 3A and 3B below, the following sequence illustratesthe foregoing system logic. In QUAD 3A, the Bid-Offer State has twoParticipants, CUSTs 3002 and 3003 each showing bids at 10 million.Participant CUST 3007 has just placed an uncleared Offer for 1 million.Participant CUST 3001 would like to take the new Offer by ParticipantCUST 3007—but cannot do so automatically. In QUAD 3B, Participant CUST3001 attempts to take the Offer by Participant CUST 3007, forcing thesystem into the When State and creating an uncleared list for the ActiveSide (i.e., Bid). However, the prequantity of the first two bidders isreduced to zero—because the system logic prevents these bids from beingenforced at the new price point (108.04+). In this example, the secondinterval timer provides both original Makers CUST 3002 and CUST 3003priority over Participant CUST 3001, with CUST 3002 retaining overallpriority via placement in the queue.

QUAD 3A >7.625.225 TZ 108.04 20 *108.04+ 1 CUST BID BOT CUST OFFER SOLD3002 10 0 3007 1 0 3003 10 0 TOTAL 20 0 1 0

QUAD 3B >7.625.225 TZ 108.04 20 108.04+ WTAK 1 CUST BID BOT CUST OFFERSOLD 3002 0 0 3007 1 0 3003 0 0 3001 1 0 TOTAL 1 0 1 0

Transactions forming a Trade take place in accordance with the inventionduring one of two trading states, known as the Workup and WorkdownStates. The Workup State occurs pursuant to Hits or Lifts by anAggressor taking the entire volume shown on the Passive Side. Onceestablished, the Workup State gives exclusive rights to the Trade to theinitial Traders—who the system recognizes as the current workers. Onscreen, current workers are highlighted in a defined manner known toother Participants. Current workers control the Trade and can submitadditional transaction volume to their contra-traders; this is to theexclusion of outside Participants. Current workers on the Active Side ofthe Trade will include the Aggressor, and possibly other Traders belowthe Aggressor with transactions that move the Trade into the “Workup”State by filling residual volume that needs “Workdown.” For the PassiveSide, an Aggressor that takes the entire size limits current workerstatus to himself and his counterparty.

The status of current worker dissipates upon entry of “done” by aParticipant or the lapse of the trading inactivity interval. Again, thisinterval is a preset system parameter triggered via system logic. Absentsuch termination, current workers can trade almost indefinitely, as longas they continue to respond to their contra-party's size offerings.

Workup State logic is shown in FIG. 8 and is tied to size and new orderdata. The Aggressor size is entered at 910 and the size of the PassiveSide is determined at 920 prior to trade entry. At test 930, the systemdetermines whether the Aggressor has taken the entire market offering atthe time of the Trade; if not, logic continues to “select state” 990 andultimately to the Workdown State (FIG. 9).

If the Aggressor has taken the entire market offering, test 930 passeslogic to 940 and 950, where the current workers are assigned and newTrades are entered by those current workers to the exclusion of otherParticipants. Under these conditions, and if more than one price queueexists on the Passive Side, the system provides for Price Improvementtrading. That is, the Aggressor has taken Trades at multiple pricepoints, indicating a willingness to trade at prices worse than the bestOffers/Bids. The system measures the Spread between the best and worstprice shown for each contra-trader. A mathematically determined value isset at 955 bridging the two price points (e.g., the average of the twoprices), with the new price difference variable, Delta (ID), set forthat Trader. Given this new price point (a “Price Improvement” from bothparties' viewpoint), new Trades may be entered at test 960 and executedat 970. This continues until the current workers are done or the presetinterval expires as determined at test 980. The system then tests (at965) and executes (at 975) any new transactions entered (via Hit or Takecommands) by new Participants.

The above logic may be better understood with examples. A system withoutthe Price Improvement feature is shown in QUAD 4A below, with a typicalopening Bid-Offer displayed.

QUAD 4A >7.625.225 TZ 108.04 16 108.05+ 45 CUST BID BOT CUST OFFER SOLD3001 5 0 3007 25 0 3002 5 0 3006 10 0 3003 1 0 3005 10 0 3001 5 0 TOTAL16 0 45 0

Assume that the Bid is Hit by Participant CUST 3005 selling the entiresize (16 million) to the Passive Side. This results in Participant CUST3005 (as the Aggressor) and the contra-trader (Participant CUST 3001) asthe current workers. The Workup State now exists as the Aggressor hastaken all of the initial size from the Passive Side. Those withpriority, the Aggressor and first best bidder, are highlighted by avideo attribute (shown in QUAD 4B as, for example, rectangular boxes).

QUAD 4B >7.625.225 TZ Refno 68119 108.04 Hit 16 108.05+ 36 CUST BUY BOTCUST SELL SOLD 3001 0 10 3005 0 16 3002 0 5 3003 0 1 TOTAL 0 16 0 16

Participant CUST 3002, wishing to continue, adds an additional 5 millionsize (adding to Participant CUST 3002's original 5 million), which isdisplayed as 5 under BUY and 5 under BOT (see QUAD 4C). A newParticipant CUST 3004 now enters a sell order (Hit) for 50 million.

QUAD 4C >7.625.225 TZ Refno 68119 108.04 Hit 16 108.05+ 36 CUST BUY BOTCUST SELL SOLD 3001 0 10 3005 0 16 3002 5 5 3004 50 0 3003 0 1 TOTAL 516 50 16

New Participant CUST 3004 waits until the current workers are done (viakeyboard entry or timer controlled system interval). After this, thesystem executes for Participant CUST 3004 the sale of the additional 5million to Participant CUST 3002, leaving 45 million remaining to besold.

QUAD 4D shows the display after Participant CUST 3004 has traded withParticipant CUST 3002. The asterisks next to the entries for CUSTs 3001and 3005 indicate that these initial Traders are done or have timed-out.As shown in QUAD 4D, no one can control the Trade to the exclusion ofothers because there is no longer a current worker.

QUAD 4D >7.625.225 TZ Refno 68119 108.04 Hit 21 108.05+ 36 CUST BUY BOTCUST SELL SOLD *3001  0 10 *3005 0 16 3003 0 1 3004 45 5 3002 0 10 TOTAL0 21 45 21

Market moves by Participants are often fast paced and can occasionallyresult in almost simultaneous position changes. For example, a firstParticipant can hit a second Participant's bid of a particular size viathe “buy/sell all” key an instant after the second Participantsignificantly increases the bid size (e.g., from 5 to 20 million). TheAggressor has now inadvertently taken much more than planned.

System logic addresses this problem by creating a supplemental state,known as “Second Look” State. When the size of the Passive Sideincreases just prior to a Hit or Lift command, the system distinguishesthe very recent increase in volume from earlier entries via an “age”timer (i.e., a system interval). The age timer tracks the pendency ofall Bids and Offers and creates a Second Look State whenever a Hit/Lift(via a buy/sell all key) command entry occurs while a Bid/Offer is lessthan, for example, two seconds old.

The Second Look State, however, is limited. The Aggressor completes thetransaction excluding the new “unaged” Bid/Offer. This new size is leftuntraded and others may add more Bids/Offers on it, the Passive Side,but these Bids/Offers stay “below the line.” Even though the Aggressordid not fill the entire size displayed, the Aggressor assumes currentworker status and has the right to:

-   -   1. take the new size, entering the Workup State with the        contra-trader;    -   2. refuse the new size (via the “done” command), sending the        Trade into the Workdown State; and    -   3. Take/Hit a “partial” amount and then lose priority, causing        the system to enter the Workdown State.

Second Look State logic is shown in FIG. 9, where trading commands areentered time-stamped at 1020 and extant passive Maker entries areentered at 1030. Test 1040 determines whether the Passive Side entries,PASS(ID), are “aged” (i.e., not just recently entered). If they areaged, logic branches to test 1090 to determine whether PASS(ID) is thelast entry, PASS_END. If not, a pass counter is incremented at 1100 andlogic returns to sequence start 1010.

If the Passive Side entries are not aged, test 1040 shifts logic to 1050where the new entry is parsed; the Aggressor is then given theopportunity to take the new additional size within the Trade at test1060. The system maintains the commitment of the Aggressor to theoriginal size of the Take or Hit. If accepted, logic branches at 1080 tothe Workup State. If not accepted, logic branches at 1070 to theWorkdown State.

These principles of the invention are illustrated in the followingsequence of screen displays shown in QUADs 5A-C below. Participant CUSTs3001, 3002, and 3003 show 5 million, 1 million, and 1 million,respectively, as having been bought. Just prior to the sell order byParticipant CUST 3007 (via, e.g., a “HIT ALL” key), CUST 3004 enterswith a 1 million size. All size transacts, except this late 1 millionbecause it has not “aged” sufficiently as measured by the systeminterval timer. This amount remains untraded, and the system enters theSecond Look State.

QUAD 5A >7.625.225 TZ Refno 68119 108.04 Hit 7 CUST BUY BOT CUST SELLSOLD 3001 0 5 3007 0 7 3002 0 1 3003 0 1 3004 1 0 TOTAL 1 7 0 7

If Participant CUST 3007 decides to fill this outstanding 1 millionsize, the state moves out of Second Look and into the Workup State withCUST 3007 and CUST 3001 as current workers. As shown QUAD 5B, CUST 3007has also entered a sell order for a volume of 2 million. The prioritybox blinks or is highlighted in some way to indicate that the Aggressoris in the Second Look State.

QUAD 5B >7.625.225 TZ Refno 68119 108.04 Hit 8 0 CUST BUY BOT CUST SELLSOLD 3001 0 5 3007 2 8 3002 0 1 3003 0 1 3004 0 1 TOTAL 0 8 2 8

If, however, CUST 3007 passes, the Trade goes to the Workdown State (seeQUAD 5C). New Participant CUST 3005 now enters and is positioned belowthe line and can only trade after CUST 3001 is done and CUST 3004trades.

QUAD 5C >7.625.225 TZ Refno 68119 108.04 Hit 7 0 CUST BUY BOT CUST SELLSOLD 3001 0 5 3007 0 7 3002 0 1 3003 0 1 3004 1 0 3005 1 0 TOTAL 1 7 0 7

Another state for trading logic is the Workdown State. It occurs whenthe original Aggressor takes less than all of the size showing on thePassive Side. The remaining size must be “worked down” to complete theTrade. This rewards those Participants that show Bids/Offers (i.e.,their intent to buy/sell), thus providing liquidity to the market. Ifthe original Aggressor returns for the remaining size from the PassiveSide, the Workup State is initiated. Another Trader from the Active Sidemay work down the remaining Passive Side quantity, putting the Trade inthe Workup State—with this new Trader as the current worker—whichincludes obtaining Exclusive Time if all the remaining size from theoriginal Bid-Offer State is taken.

The Workdown State allows new Aggressors to complete the remaining unitBids on the Passive Side. Workdown State logic is shown in FIG. 10.Trading command CMD(I) is entered at 1210. At test 1220, the systemchecks whether the Trade is for less than the total Passive Side, TOTL.If not, logic branches at 1280 to the Workup State.

If the Trade is for less than the total Passive Side, test 1220 passeslogic to 1230 where the system opens trading to new Aggressors in orderto complete the pending Passive Side volume. However, no new PassiveSide entries are entitled to Exclusive Time and are thus blocked at 1240for the trade duration. Test 1250 determines whether the last Tradeoccurred and test 1260 determines whether the timer has lapsed. Ifeither has occurred, Workdown is terminated and the process returns at1270 to the Bid-Offer State.

Importantly, new Traders presenting on the Passive Side wait until allof the remaining original size is worked down—and their positions areheld below the line. This is shown in QUADS 6A-6C.

QUAD 6A >7.625.225 TZ 108.04 15 *108.04+ 25 CUST BID BOT CUST OFFER SOLD3001 5 0 3007 25 0 3002 10 0 TOTAL 15 0 25 0

QUAD 6A shows the Bid-Offer State with Participant OUST 3001 showing abid of 5 million and Participant CUST 3002 showing a bid of 10 million.As the Aggressor, OUST 3001 Takes an Offer from CUST 3007, but for only5 million of CUST 3007's showing of 25 million, leaving 20 million onthe Passive Side (see QUAD 6B).

QUAD 6B >7.625.225 TZ Refno 68118 108.04 11 108.04+ TAK CUST BUY BOTCUST SELL SOLD *3001 0 5 3007 20 5 TOTAL 0 5 20 5

At this point, if Participant OUST 3006 enters a 10 million Offer, CUST3006 waits until the original Passive Side clears; CUST 3006 is thuskept below the line as the remaining size is worked down (see QUAD 6C).

QUAD 6C >7.625.225 TZ Refno 68118 108.04 11 108.04+ TAK 5 CUST BUY BOTCUST SELL SOLD *3001 0 5 3007 20 5 3006 10 0 TOTAL 0 5 30 5

A Trade is cleared by either a system controlled timer or directly by aParticipant when that price point attracts no further buyers or sellers.The clearing function resurrects a new Bid-Offer State, retainingoriginal Makers from the Active Side (unless superceded) and theremaining untraded size from the Passive Side.

As discussed above, the system can provide enhanced performance allowingPrice Improvement processing. Price Improvement provides a modifiedinteractive Bid-Offer State and transforms the auction process into amultiple price auction process, where buy or sell orders are executed atone or more prices.

For Price Improvement, the Bid-Offer State reveals Participants willingto trade at prices above or below the current best market prices,particularly at sizes that may be significantly larger than the currentsizes shown to the marketplace at the best Bid-Offer. All rules of theBid-Offer State apply to each individual price stack or tier under PriceImprovement. Priority is retained only in the top tier and by the bestprice, first bidder/offeror.

If an Aggressor acts on only one level, then the Workup or WorkdownState (as previously described) is initiated and limited to that queue'sprice level. Even in this single level environment, a Trade may be“price improved” by system logic. This can occur, for example, if anAggressor enters the Workup State. Price Improvement will be triggeredby a passive Trader entering a better priced buy/sell. If the initial“best” passive Trader matches this new better price, the Trade will beconsummated, but at a price determined by the system that is between thenew better price and the original trade price, thus improving the pricefor both sides of this Trade. This is an example of Price Improvementinitiated by the Passive Side via When State processing. The same systemdetermined price would occur if the initial best passive Trader declinedto match the new better price, turning the Trade over to the new PassiveSide Trader.

This demonstrates that by becoming an Aggressor in a Price ImprovementTrade, the Aggressor creates the possibility that a buy or sell ordermay be executed at a better price than is revealed by the current stateof Bids and Offers displayed on the system. By doing so, the Aggressorinitiates a modified Workup State (discussed below with respect to FIG.8).

QUAD 7A shows three levels of Bids and Offers. The number of levelsshown is a system parameter and is typically tied to the number of priceincrements on the Bid and Offer sides, that is, a cardinal arrangement(e.g., 1132 increments). An alternative tier arrangement includes anordinal arrangement (e.g., “top five tiers”). In this example, allParticipants are shown four bids totaling 67 million (CUSTs 2001 and2002 showing a total of 2, CUST 2005 showing 20, and CUST 2012 showing45). These bids range from 100.01 down to 100.00. QUAD 7A also showsfive offers totaling 85 million (CUSTs 2007 and 2006 showing a total of15, CUST 2008 showing 10, and CUSTs 2007 and 2011 showing a total of60), ranging from 100.02 up to 100.03+. This contrasts with a singlequeue Bid-Offer State where only two Bids totaling 2 million at 100.01and two Offers totaling 15 million at 100.02 would be shown.

An alternative arrangement (not shown) may not disclose all prices andsizes to all Participants. In this case, system logic controls thesecondary tiers and buy and sell allocations.

QUAD 7A 100.01 CUST BID 2 BOT 100.02 CUST 15 OFFER SOLD 2001 1 0 2007 50 2002 1 0 2006 10 0 TOTAL 2 0 15 0 100.00+ 20 100.03 10 2005 20 2008 100 TOTAL 20 10 0 100.00 45 100.03+ 60 2012 45 2007 20 2011 40 TOTAL 45 600 100 .45x.00 20 x .00+ 2x 2x .01 X 15x .02 10x.03 60x .03+

The logic of the Workup State with Price Improvement encouragesParticipants to reveal their trading intentions even away from the bestprice shown by allowing them to participate in a Price Improvement Tradeif one is initiated. For example, Price Improvement will attach to aParticipant who becomes an Aggressor away from the best market prices of100.01 and 100.02 (of QUAD 7A). By revealing such intentions, theAggressor gains first priority for potential price improvement duringexecution of the volume associated with the price surplus. Priorityrankings provide the opportunity for purchases and sales at betterprices than the best market of 100.01 and 100.02 by allowing the Buyersor Sellers' Surplus created upon the initiation of a Price ImprovementTrade to be allocated among the Participants (i.e., allow the system toset a price-improvement price).

The Aggressor who initiates the Price Improvement Trade is grantedprotection by allowing contra-traders to buy or sell more at the higheror lower prices shown. This is accomplished by system logic thatmeasures the surplus and allocates any available surplus among theTrader and contra-traders. By allowing one or both sides of the Trade toexecute Trades at better prices than their respective revealedintentions, aggressive and/or passive Traders benefit. The systembenefits the market by creating greater liquidity, improving revealedintentions of bidders and offerors, increasing depth of markets,allowing multiple price Trades, and forming the foundation foralternative commission fees.

Once trading commences, state sequencing follows the logic of a singleprice Trade. For example, in the Price Improvement Bid-Offer State shownin QUAD 7A, a new seller becomes the Aggressor with a command to sell 90million down to 99.31 (i.e., 99+ 31/32nds). In order to improve theseller's ability to sell at the “best price” available, the first bestbidder whose priority is ranked on a price and time basis (or by ametric comprised therefrom or including size as well) is given theopportunity to buy additional volumes at an improved price after the 67million has been Hit (i.e., 2 million sold at 100.01, 20 million sold at100.00+, and 45 million sold at 100.00). By offering to sell a total of90 million down to 99.31, the seller sells the first 67 million and has“intent” to sell 23 million more. The first best bidder can now executemore at an improved price. The level of improvement is allocated betweenthe bid price of 100.01 (i.e., 100+ 1/32nd) and the 99.31 reservationprice. Thus, if buyer CUST 2001 trades the remaining 23 million with the99.31 seller, then a Price Improvement Trade of 23 Hit at 100.00 isconsummated. Here, buyer CUST 2001 maintains priority by committing tobuy 23 million more at the bid level of 100.01. However, the actualtrade price is, for example, 100.00, providing the buyer with 0.01 (1/32) price improvement and the seller with a like 0.01 priceimprovement over the reservation sale price of 99.31.

System logic has apportioned the Trader Surplus between the aggressiveand passive sides of the Trade, benefitting both parties. System logiccould also allocate the surplus alternatively (e.g., providing theAggressor with ⅔, all, or none of the surplus). The allocation mechanismcould also dynamically change depending on the size of the Trade orother customer or trade characteristics. The system flashes the sequenceof three Trades, 2 @ 100.01, 20 @ 100.00+, 68 (45+23) @ 100.00,preferably with highlighting to indicate that the sequence is a set ofPrice Improvement Trades. Alternatively, the total Trade at the averageprice could be displayed. At the end of the Trade, system logic returnsto the Bid-Offer State.

Under Price Improvement processing, separate mechanisms present anddisplay multiple Bid-Offers at different price levels. A first option isto remove all out of market Bid-Offers (i.e., all inferior offerings arenot displayed). A second option provides the bidder with a choice as towhether the bidder's inferior bid is left on the display or removed whentopped with a better price. A third option is to display all bids onscreen even when topped. This forms a “good till cancel” offering.Another option allows Participants to customize their Bids and Offersunder system controlled parameters.

Price Improvement processing also permits priority preserved trading,which occurs in a When State. The When State occurs when a non-priorityParticipant initiates or responds to a trading command. System logictriggers the When State allowing the priority bidder (e.g., the one withthe first best price on the passive market side) to intercede and assumecontrol of the Trade. During the When State, a timer controls a periodof time during which the priority bidder can decide whether tointercede. The original buyer (whose trading command initiated the WhenState) is placed right behind the priority bidder, and othernon-priority buyers are placed in sequence behind the first Aggressor.If the priority bidder does not intercede, logic turns the Trade over tothe ranked list of buyers and the Trade moves to the Workup or WorkdownState for completion. By interceding, the first best bidder maintainspriority by matching the best price among the When Take Trades.

By initiating a Price Improvement here, the Hit, highlighted by videoattribute, is for more size than is shown on the number of tiers of Bidsor Offers available for Price Improvement.

In order to provide a greater and more diverse opportunity for PriceImprovement and to protect the Price Improvement Aggressor, all buy andsell orders received during Exclusive Time are ranked and matched toprovide the greatest amount of price protection to the Price ImprovementAggressor. Because of multi-levels of Bids and Offers, the first bestbidder/offeror maintains priority only if that bidder/offeror respondsat the Aggressor's price, or, if necessary, matches the best WhenTake/Hit price.

Referring to QUAD 7B, Participant CUST 2008 becomes the Aggressor byinitiating a Price Improvement Trade by committing to sell 90 milliondown to a price of, for example, 99.31. During Exclusive Time,Participant CUST 2001 commits to buy 5 million more at 100.01,Participant CUST 2009 commits to buying 20 million at 100.01+, andParticipant CUST 2002 commits to buying 5 million more at 100.01.Customer 2001 does not then match the buy price of 100.01+.

QUAD 7B 100.01 to .00 HIT 67 CUST BUY BOT CUST SELL SOLD 100.01+ 2009 20100.01 2001 5 1 2008 23 67 2002 5 1 TOTAL 2 100.00+ 2005 0 20 TOTAL 20100.00 2012 0 45 TOTAL 67

CUST 2001 has a priority over CUSTs 2002 and 2009 by having been theoriginal best bidder and commits to buying more at CUST 2001's originalprice. At the end of Exclusive Time, 20 of the 23 million to be sold arematched with the best buys shown, thus 20 million are sold to 2009. Theremaining 3 million are sold to CUST 2001. By not matching the100.01+price, CUST 2001 only obtains the 3 million. By maintaining priceand time priority, price improvement is obtained and the Aggressor isprotected. The Trades are shown in QUAD 7C.

QUAD 7C 100.00 X 45 .00 + X23 .01X22HIT CUST BUY BOT CUST SELL SOLD100.01 2001 1 2008 22 2002 1 2009 20 TOTAL 22 22 100.00+ 2005 20 2008 232001 3 TOTAL 23 100.00 2012 45 2008 45 TOTAL 45 45 TOTAL 90 90

Participants interact with system logic during Price Improvement tradingvia an input device. Various input devices can be used as exemplified bythe specialized keyboard shown in FIG. 12. The keyboard includes specialLCD keys, whose function and display is directly tied to the state ofthe trading processor. The keyboard has two vertical rows of 5 LCD keyseach and a horizontal row of 7 LCD keys. The horizontal row of LCD keysdynamically displays the three different price levels available on boththe Bid and Offer sides. This row is called the “Price Row.” Thisdisplay updates in real time as prices change in the trading processor.The center key in this row shows a price incrementor value. The mostappropriate incrementor value is determined by the trading processorbased on the range of the Spread between the best and worst markets.This incrementor value is also updated in real time as prices change.The bid prices travel to the left of the keyboard from the center key inorder of best to worst. Similarly, the Offer prices travel to the right.As different price levels appear in the Price Improvement Bid-OfferState, they are displayed in the Price Row. To facilitate data entry andquick reaction to the market, a Participant simply presses one of theLCD keys to chose which price level at which to trade. After selectingthe price, the Participant chooses one of the action keys represented bythe vertical row of the LCD keys. If the Participant wants to tradebelow or above the current shown prices in the market, the Participantcan use the incrementor key to indicate how far above or below theprices to go.

The capabilities of the foregoing keyboard arrangement can be realizedin several alternative embodiments. For example, the input commands canbe arranged on a touch screen or touch pad transducer (e.g., a “mouse”).Other vehicles for inputting commands include voice command, voiceactivated navigation, and other “location” devices known in the art. Theuse of the term “key” is meant to include a command or data entrytrigger (i.e., a device or switch) that when activated accomplishes aparticular task.

The logic associated with the five states discussed herein is summarizedin tabular form in FIG. 11. Features of the foregoing system haveresulted in a dramatic increase in efficiency and in a reduction oftrading order errors.

The often frenetic environment of bidding, offering, and trading, andthe entry of commands on the preferred dedicated keypads shown in FIGS.3A-B and 12, and the likelihood of Participants changing their minds,all contribute to the possibility that an erroneous Trade may be made.More particularly, errors can arise because of an incorrect entry in thesystem, a miscommunication, and the like. These errors can often force a“principal” Participant into an unintended position during a Trade.

The invention preferably provides ways for a Participant to effectively“undo” a Trade, either by canceling a pending order, or rolling backexecutions during a trade State. As shown in FIGS. 3A-B and 12, keypadspreferably provide cancel (CXL), DONE, and UNDO keys to facilitate thisprocess. The function of these keys while the system is in a particularstate is described below. Note that the names of these keys arearbitrary and any input means can be used to effect the desired actions.

In the Bid-Offer State, the CXL command removes a Maker's existingmarkets from one or more instruments.

In the When State, CXL removes a Maker's markets only if there are nopending active BUY or SELL orders against it. Also, DONE removes fromtrading lists a potential Aggressor, as well as trade Participants,before orders are matched.

During the Workdown State, CXL removes any remaining passive Maker'smarkets. DONE performs the same function as CXL and also allows thePassive trading Participants in the Workdown State to remove themselvesfrom trading lists, thus effectively removing their committed sizesbefore the system has had a chance to execute them. The UNDO function“unrolls” the Trade and reduces the size shown to Participants whenexecuted during a predefined time period after the initial Trade.Additionally, the UNDO function proportionately reduces the amounttraded by all passive Makers. The restriction of a predefined timeperiod discourages a Trader from taking unfair advantage of thiscorrection facility. Analogously, if no more than one Traderparticipated in the Trade, the UNDO function causes the Trader to jointhe contra-side for the size desired to be undone. The UNDO function canbe invoked at any time by any Participant on the Active Side or thePassive Side; system logic preferably maintains the fairness of thistrading protocol.

During the Workup State, the DONE function can remove a Participant fromthe Active Side, Passive Side, or both simultaneously, regardless of thesize traded or solicited. In sum, the DONE function removes theParticipant from the Trade. The UNDO function can also roll back theTrade provided that the first active Trader has executed this functionwithin a predefined time period following the Trade. If the UNDOfunction is not invoked during this predefined period, or the Trader isnot the first active Trader, then the Trader is entered immediately inthe queue to buy or sell on the contra-side. Preferably, the Trader isplaced at the top of the list such that the UNDO function can beeffectively invoked immediately, provided there is a contra-trader. Mostpreferably, the rights of the first Active and Passive Traders aremaintained to assure fairness.

Thus it is seen that automated price improvement protocol systems andmethods are presented. One skilled in the art will appreciate that theinvention can be practiced by other than the described embodiments,which are presented for purposes of illustration and not of limitation,and the invention is limited only by the claims which follow.

We claim:
 1. A computer system for electronic order entry of items viaelectronic communication, said system comprising: an input device toenter order information and commands, said input device comprising aplurality of input keys or a plurality of input regions having indicia,a first subset of said keys or regions having indicia that changedynamically in response to trading conditions.
 2. The system of claim 1wherein said regions are arranged on a touch screen.
 3. The system ofclaim 1 wherein said regions are arranged on a touch pad transducer. 4.The system of claim 1 wherein said regions are selectable via a mouse.5. The system of claim 1 wherein said keys are arranged on a keypad orkeyboard.
 6. The system of claim 1 wherein said keys or regions comprisetriggers, switches, or devices that when individually activatedaccomplishes a particular task.
 7. The system of claim 1 wherein saidindicia comprise liquid crystal displays (LCDs).
 8. The system of claim1 wherein said first subset of keys or regions have indicia of itemquantities that change dynamically in response to trading conditions. 9.The system of claim 1 wherein said first subset of keys or regions haveindicia of item prices that change dynamically in response to tradingconditions.
 10. The system of claim 1 wherein said indicia includesindication of the yield of at least one of said items.
 11. The system ofclaim 1 wherein said indicia includes indication of the market of anissue of at least one of said items.
 12. The system of claim 1 whereinsaid indicia includes indication of whether said input device is enabledor disabled.
 13. The system of claim 1 wherein a second subset of saidkeys or regions is assigned to particular ones of said items.
 14. Thesystem of claim 13 wherein said second subset of keys or regions isarranged in one or more rows on said input device.
 15. The system ofclaim 1 wherein a third subset of said keys or regions is assigned toparticular markets or issues of said items.
 16. The system of claim 15wherein said third subset of keys or regions is arranged in one or morerows on said input device.
 17. The system of claim 1 wherein a fourthsubset of said keys or regions is assigned to order commands.
 18. Thesystem of claim 17 wherein said order commands include bid, offer, buy,and sell.
 19. The system of claim 17 wherein said input device providessingle keystroke entry of at least one of said order commands.
 20. Thesystem of claim 17 wherein said fourth subset has multiple keys orregions for at least one of said order commands.
 21. The system of claim20 wherein said multiple keys or regions for each order command isarranged in a column.
 22. The system of claim 21 wherein one column ofsaid multiple keys or regions is for entering buy orders and anothercolumn of said multiple keys or regions is for entering sell orders. 23.The system of claim 22 wherein one column of said multiple keys orregions is for entering bids and another column of said multiple keys orregions is for entering offers.
 24. The system of claim 23 wherein saidbid column of keys is disposed to the left of said buy column of keys.25. The system of claim 23 wherein said offer column of keys is disposedto the right of said sell column of keys.
 26. The system of claim 22wherein a numeric keypad is disposed between said buy and sell columnsof keys.
 27. The system of claim 17 wherein said fourth subset comprisesmultiple buy keys or regions, each said buy key or region operative toenter a buy command for a different item.
 28. The system of claim 17wherein said fourth subset comprises multiple sell keys or regions, eachsaid sell key operative to enter a sell command for a different item.29. The system of claim 17 wherein said fourth subset comprises multiplebuy keys or regions, each said buy key or region operative to enter abuy command at a different price.
 30. The system of claim 17 whereinsaid fourth subset comprises multiple sell keys or regions, each saidsell key or region operative to enter a sell command at a differentprice.
 31. The system of claim 1 wherein said plurality of keys orregions has a column of keys or regions for canceling bids and anothercolumn of keys or regions for undoing functions.
 32. The system of claim31 wherein said plurality of keys or regions has a column of buy keys orregions, said column of keys or regions for canceling a bid disposed tothe left of said buy column of keys or regions.
 33. The system of claim31 wherein said plurality of keys or regions has a column of sell keysor regions, said column of keys or regions for undoing a functiondisposed to the right of said sell column of keys or regions.
 34. Thesystem of claim 1 wherein said input device comprises a subset of saidkeys or regions, each operative to display a different issue of saiditems.
 35. The system of claim 1 wherein said input device comprises asubset of said keys or regions, each operative to display a differentmarket of said items.
 36. The system of claim 1 wherein said inputdevice comprises a subset of said keys or regions, each operative todisplay a different pricing event as it occurs.
 37. The system of claim1 wherein said input device comprises a key or region operative todisable/enable said input device.
 38. The system of claim 1 wherein saidinput device comprises a key or region operative to enter a buy-allcommand.
 39. The system of claim 1 wherein said input device comprises akey or region operative to enter a sell-all command.
 40. The system ofclaim 1 wherein said input device comprises a subset of said keys orregions, each operative to cancel bids and offers for a specified pageand issue.
 41. The system of claim 1 wherein said input device comprisesa subset of said keys or regions, each operative to display informationpertaining to a different issue of said items.
 42. The system of claim 1wherein said input device comprises a subset of said keys or regions,each operative to mark a page as done.
 43. The system of claim 1 whereinsaid input device comprises a subset of said keys or regions, eachoperative to input a different page number onto a command line.
 44. Thesystem of claim 1 wherein said input device comprises a subset of saidkeys or regions, each operative to cause information pertaining to aparticular issuer of said items to be displayed.
 45. The system of claim1 wherein one of said items is a financial instrument.
 46. The system ofclaim 1 wherein one of said items is selected from the group consistingof a futures contract, an options contract, an equity instrument, afixed income instrument, and a U.S. Treasury debt instrument.
 47. Thesystem of claim 1 wherein one of said items is selected from the groupconsisting of a derivative financial product and a physical commodity.48. The system of claim 1 wherein one of said items is selected from thegroup consisting of art, automobiles, electricity, pollution rights,carbon dioxide, and wine.
 49. The system of claim 1 wherein one of saiditems is selected from the group consisting of an equity/debt hybridinstrument, a municipal debt instrument, a preferred stock, and aconvertible bond.
 50. A method of trading items in an electronicinteractive trading system, said method comprising: receiving bids,offers, and volume information entered via an input device having aplurality of keys or regions, said keys or regions having indiciaindicating prices and volume; dynamically updating said indicia inresponse to trading conditions; and receiving buy and sell ordersentered via said input device having a subset of said keys or regionsdedicated to single keystroke entry of said buy and sell orders.
 51. Themethod of claim 50 wherein said input device comprises a keyboard. 52.The method of claim 50 wherein said regions are selectable via a mouse.53. The method of claim 50 wherein said indicia comprise liquid crystaldisplays (LCDs).
 54. The method of claim 50 further comprising receivinga buy-all command entered via said input device having a key or regiondedicated to entering said buy-all command.
 55. The method of claim 50further comprising entering a sell-all command entered via said inputdevice having a key or region dedicated to entering said sell-allcommand.